Pandora's box: The cost of 'free' music

ONLINE MEDIA

Updated 10:57 pm, Thursday, November 29, 2012

Pandora paid 54 percent of its revenue to record companies and artists in 2011.

Pandora paid 54 percent of its revenue to record companies and artists in 2011.

Photo: Andrew Harrer, Bloomberg

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Joe Kennedy, the CEO of Pandora answered a question from the audience. Glimpse, a social discovery conference, for investors and media was held at the Marriott Union Square in San Francisco, Calif. Wednesday June 6, 2012. less

Joe Kennedy, the CEO of Pandora answered a question from the audience. Glimpse, a social discovery conference, for investors and media was held at the Marriott Union Square in San Francisco, Calif. Wednesday ... more

Photo: Brant Ward, The Chronicle

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In 2002, Napster employees packed up after the company was driven bankrupt on the basis of copyright infringement.

In 2002, Napster employees packed up after the company was driven bankrupt on the basis of copyright infringement.

Photo: Michael Macor, SFC

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Artists such as Katy Perry signed an open letter opposing the lowering of royalty rates.

Artists such as Katy Perry signed an open letter opposing the lowering of royalty rates.

Photo: Frank Micelotta, EMI

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Artists such as Rihanna signed an open letter opposing the lowering of royalty rates.

Artists such as Rihanna signed an open letter opposing the lowering of royalty rates.

Photo: Charles Sykes, Associated Press

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Traders wearing Pandora Media Inc. jackets work on the floor of the New York Stock Exchange in New York, U.S., on Wednesday, June 15, 2011. Pandora Media Inc., the online-radio company, surged after its shares priced above the top of range, giving investors a chance to benefit from the limited number of new Internet stocks. less

Traders wearing Pandora Media Inc. jackets work on the floor of the New York Stock Exchange in New York, U.S., on Wednesday, June 15, 2011. Pandora Media Inc., the online-radio company, surged after its shares ... more

Photo: Ramin Talaie, Bloomberg

Pandora's box: The cost of 'free' music

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How much should "free" music cost and who should pay for it?

That's the deceptively simple question at the heart of the latest round of legal wrangling surrounding the Oakland-based online radio service Pandora, which has launched an effort to get federal legislation passed to lower royalty rates paid to musicians so that it may remain competitive.

In response, more than 100 artists, including high-profile acts like Rihanna, Pink Floyd and Katy Perry, have signed an open letter opposing the move. "Pandora's principal asset is the music," the letter states. "Why is the company asking Congress once again to step in and gut the royalties that thousands of musicians rely upon? That's not fair and that's not how partners work together."

Pandora argues that Internet radio royalty fees should be in line with those of other services, such as cable and satellite radio. According to the company, it paid 54 percent of its revenue to record companies and artists last year. By comparison, Sirius satellite radio paid 8 percent. Pandora, however, agreed in 2007 with the artists' and labels' representative organization to its royalty rate.

Remember Napster

If all of this sounds somewhat familiar, it's because the dispute echoes similar controversies that have arisen ever since Napster first knocked the record industry off its axis a decade ago by introducing the concept of free, unregulated downloading of music over the Internet.

The major labels were ultimately able to drive Napster out of business on the basis of copyright infringement but the genie was out of the bottle. Fans came to expect convenient and low-cost access to music around the clock.

The dominance of the Internet as an information delivery platform means that the issue of what should be free and who should pay for it has, if anything, become even more complicated - so much so that virtually any solution is bound to short-change at least one part of the music industry itself.

"The whole concept that Pandora is out to screw artists is just not true," said Brian Zisk, founder and executive producer of the SF MusicTech Summit conference series. "What Pandora is trying to do is survive. If terrestrial radio was paying ... terrestrial would end up paying $4 billion for the same usage."

Raising revenue

At issue is that while satellite and terrestrial radio have effectively monetized their services by passing on costs to listeners - either through subscription fees or sizable advertising blocks - Pandora largely remains free.

"If the government makes it possible for Pandora to run with just a minute of advertising an hour, is anyone going to listen to traditional radio anymore?" said Robert Levine, former executive editor of Billboard and author of the book "Free Ride," which explores the impact new media has had on the business of content creators.

According to Pandora's fourth-quarter financial report, 90 percent of its revenue comes from pop-up and audio advertising, which in the online world not only tends to drive away users (in many cases, to music pirating outlets) but have yet to prove effective, especially as more users shift to mobile devices.

"Mobile advertising is not taking off for many reasons so, like Facebook, Pandora is struggling to make any sizable revenue from mobile ads," said Dave Allen, founding member and bass player for the bands Gang of Four and Shriekback, who blogs frequently about developments on the digital music front.

Slow to change

It's a confusing debate for Pandora's 175 million users and even the members of Congress who are being asked to weigh in. The music industry, which is notoriously slow to adapt to change, has been in free-fall for more than a decade as new business models keep emerging without clear guidelines in place for compensation for creative works, with artists suffering the most in the process.

"It's a tough situation," Zisk said. "There's this fight over the perceived remaining scraps and not a focus on how to build the pie."

Casey Rae, deputy director of the artists' advocacy group Future of Music Coalition, said that while he would like to see Pandora survive, the bill getting batted around in Washington at the moment isn't the solution.

"It doesn't take into account enough factors," he said. "There's no economic backbone to it. There haven't been any impact studies. We need more data. We need to take the broader market to decide this is good."

Levine agreed. "People in the music industry always disagree on how to make money," he said. "This is one of the few things in which there's almost no disagreement. It's a pretty big deal."

The music makers

The people who actually make the music, meanwhile, can't do much more than voice their concerns while music labels, politicians and venture capital-backed startups battle it out over the money - of which there's less and less these days.

"Musicians are grossly devalued at the moment," said Jordan Kurland, producer of the Noise Pop music festival in San Francisco and manager for artists Death Cab for Cutie and Bob Mould. "It's just a reality and hopefully it goes back around."

On Wednesday, the House Judiciary Committee's Subcommittee on Intellectual Property, Competition and the Internet held the first in a series of hearings on music licensing.

There the debate shifted yet again: Rather than considering the idea of reducing Internet radio's royalty obligations, many representatives questioned why broadcast radio wasn't paying any royalties at all.

In the long run, though, the biggest impact may be on music fans.

The artists, who have been sidelined by the legal battles while their income levels steadily fall, may lose patience with the business altogether, leaving everyone with less music to fight over.

"If musicians are never going to share equally in revenue streams from these companies, why would they continue to make music?" Allen asked.

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